Section 75-1.1 and Mortgage Servicing: Lessons From a Federal Bankruptcy Court in New York

by Ellis & Winters LLP
Contact

Claims under N.C. Gen. Stat. § 75-1.1 can turn up in unexpected places—including a bankruptcy court in Manhattan. Recently, a section 75-1.1 claim made its way from Hyde County, North Carolina, to the Big Apple, courtesy of the bankruptcy proceedings of GMAC Mortgage and its parent, Residential Capital.

In re Residential Capital, LLC, a decision of the U.S. Bankruptcy Court for the Southern District of New York, illustrates the potentially broad scope of “unfair” conduct under section 75-1.1.

The Claims at Issue

In Residential Capital, Rex and Daniela Gilbert sued their mortgage servicer to contest a foreclosure on their house on Ocracoke Island. The Gilberts accused GMAC Mortgage of charging usurious interest on the loan, providing inadequate loan disclosures under the federal Truth in Lending Act at loan origination, and submitting a false affidavit in the later foreclosure proceedings. As often happens in North Carolina lender-liability cases, the Gilberts argued that each type of alleged misconduct stated an independent violation of section 75-1.1.

Although the Gilberts filed their lawsuit in Hyde County Superior Court, the lawsuit was removed to the U.S. District Court for the Eastern District of North Carolina, which dismissed the Gilberts’ claims.  The Gilberts appealed to the U.S. Court of Appeals for the Fourth Circuit, which reinstated several of their claims, including some of their claims under section 75-1.1.

The Gilberts’ appellate victory against GMAC and Residential Capital was short-lived, however, because these companies declared bankruptcy before the Fourth Circuit even issued the mandate in the Gilberts’ appeal. The bankruptcy filing stayed the Gilberts’ claims against GMAC and Residential Capital, leading the Gilberts to file a proof of claim for six million dollars in the bankruptcy proceedings. When GMAC and Residential Capital objected to the Gilberts’ claims, the claims came before the U.S. Bankruptcy Court for the Southern District of New York for a ruling on the objections.

The Bankruptcy Court’s Analysis

The bankruptcy court separately considered whether each type of conduct alleged by the Gilberts was a 75-1.1 violation. Each part of the court’s analysis offers a useful lesson.

First, the bankruptcy court decided that even though the Gilberts’ loan was too large to be covered by North Carolina’s usury statutes, the loan could still violate section 75-1.1 on a usury-like theory. The court stated that “collection of interest in excess of the rate provided for by agreement may rise to the level of a violation of [section 75-1.1] where the conduct was unfair or deceptive.” This reasoning shows how the potential scope of section 75-1.1 exceeds the scope of other consumer protection statutes, such as usury statutes.

Second, the court rejected the Gilberts’ argument that GMAC violated section 75-1.1 by not allowing the Gilberts to rescind their loan. Here again, the court reasoned that even if GMAC’s actions did not violate the federal Truth in Lending Act, the conduct could nonetheless be unfair for 75-1.1 purposes. In other words, the court analyzed the Gilberts’ claim as one for direct unfairness.

The court, however, concluded that GMAC acted substantively fairly when it rejected the Gilberts’ demand for rescission. The court noted that the Gilberts had not shown any material disclosure errors, and it stressed that GMAC had offered to reexamine its denial of rescission if the Gilberts came forward with additional information. This conclusion reflects another important point: for direct-unfairness claims, whether conduct is “unfair” often turns on the court’s choice of the facts to focus on. Matt Sawchak and Kip Nelson make this point in their 2012 North Carolina Law Review article.

Third, the bankruptcy court held that “[t]he execution of false affidavits is ‘an unfair and deceptive practice within the meaning of [section 75-1.1].’” The court quoted In re Chesson, a 2012 decision of the U.S. Bankruptcy Court for the Middle District of North Carolina. In Chesson, though, the claimant made payments in reliance on a false affidavit. That was not the case with the Gilberts. In their case, the false affidavit communicated information to the court that oversaw their foreclosure, not to the Gilberts themselves.

Thus, Residential Capital seems to overlook the North Carolina Supreme Court’s recent decision in Bumpers. Bumpers rejects the idea that a plaintiff can recover treble damages under section 75-1.1 for a representation “in the air,” so to speak. Instead, a private plaintiff under section 75-1.1 must show that he actually and reasonably relied on the misrepresentation at issue. Residential Capital, like a recent unpublished decision of the North Carolina Court of Appeals, shows that where false affidavits are concerned, defendants would benefit by pointing out that even affidavits are representations.

Finally, Residential Capital illustrates the wide range of authorities that can come up in 75-1.1 cases. In its analysis of the 75-1.1 claim, the bankruptcy court cited decisions not only from courts in North Carolina, but also from New Mexico, Maine, and the Seventh Circuit. Given the fact-specific nature of most 75-1.1 cases, a litigant—especially one who is dealing with a 75-1.1 claim outside of North Carolina—should expect that the court could travel far to decide whether the defendant’s conduct qualifies as unfair or deceptive.

As Residential Capital shows, section 75-1.1 can play a leading role in litigation over mortgage practices. Lenders and mortgage servicers that can document reasonable conduct, and that have implemented practices to make sure that their loan documents and affidavits are accurate, will be best positioned to defend these claims.

Lauren Golden contributed to this post.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Ellis & Winters LLP | Attorney Advertising

Written by:

Ellis & Winters LLP
Contact
more
less

Ellis & Winters LLP on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.